Patterson-UTI Energy, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Patterson-UTI provides land-based contract drilling, pressure pumping primarily in the Appalachian Basin, and holds working interests in oil and natural gas properties. At year-end it had 341 marketable drilling rigs. The company exited its drilling and completion fluids business on January 20, 2010; its historical results are presented as discontinued operations.
Key financial results
| Metric | 2009 | 2008 |
|---|---|---|
| Continuing-operations revenue | $781.9 million | $2,063.9 million |
| Operating income (loss) | ($48.2) million | $545.9 million |
| Net income (loss), including discontinued operations | ($38.3) million | $347.1 million |
| Diluted EPS | ($0.25) | $2.23 |
| Cash from operating activities | $453.7 million | $675.0 million |
| Capital expenditures | $452.6 million | $445.4 million |
| Cash and cash equivalents at year-end | $49.9 million | $81.2 million |
| Working capital | $264.0 million | $338.8 million |
| Revolver borrowings at year-end | None | None |
Revenue fell approximately 62%; the reported operating margin was approximately negative 6.2%, versus positive 26.5% in 2008. Operating cash flow remained positive despite the loss, with cash flow benefiting in part from a $213.8 million reduction in receivables. Capital expenditures nearly matched operating cash flow.
- Contract drilling: Revenue was $599.3 million, down 66.8%; segment operating loss was $11.2 million. Average rigs operating dropped to 91 from 254, and average revenue per operating day declined to $17,950 from $19,380.
- Pressure pumping: Revenue was $161.4 million, down 25.8%; operating income fell to $1.0 million from $42.0 million. Jobs declined 43.7%, although average revenue per job rose as the mix shifted toward larger unconventional-well work.
- Oil and natural gas: Revenue was $21.2 million, down 49.9%; operating income was $1.0 million. Average oil and gas sales prices and production both declined.
- Discontinued fluids business: Revenue was $79.8 million, down from $145.2 million; the segment recorded a $4.3 million after-tax loss in 2009. A $1.9 million impairment was recorded to reduce assets held for sale to estimated fair value less selling costs.
Material changes versus the prior comparable period
- Lower commodity prices and the economic downturn curtailed customer drilling programs. Average monthly rigs operating fell from 283 in October 2008 to 60 in June 2009, then recovered to 118 in December.
- Average Henry Hub natural gas price was $4.06 per Mcf in 2009 versus $9.13 in 2008. Management attributed sharply lower drilling activity and pricing to commodity weakness and excess rig capacity.
- Quarterly results showed a first-quarter profit followed by losses in each remaining quarter. Fourth-quarter revenue was $213.6 million, operating loss was $22.9 million, and net loss was $18.2 million.
- Cash dividends were reduced from $0.60 per share in 2008 to $0.20 in 2009. The board approved a further $0.05-per-share dividend for March 2010.
- The company retired or removed 23 rigs from its marketable fleet during 2009 and recorded $10.5 million of related drilling-equipment impairment. It reported no impairment of contract-drilling long-lived assets or its remaining $86.2 million of goodwill.
Outlook, liquidity, risks, and unusual items
- Management said available liquidity and expected operating cash flow should fund current plans and obligations. It cited $194 million of available capacity under a $240 million revolving facility, after $46.3 million of outstanding letters of credit, and expected approximately $114 million in 2010 tax refunds from carrying back net operating losses. These are management expectations, not guaranteed proceeds.
- The company had $186.2 million of major-equipment purchase commitments, expected to be delivered in 2010. It was in compliance with credit-facility covenants at year-end; the facility matures January 31, 2012.
- No formal numeric operating guidance was provided. Management emphasized that results depend on volatile oil and gas prices, customer spending, rig utilization and day rates, and competition from excess or newly reactivated rig capacity.
- Other material risks include customer credit and payment risk, equipment and qualified-labor availability, environmental and regulatory exposure, operational accidents, and insurance that may not cover full rig replacement cost or lost earnings. A material future goodwill impairment remains possible if market conditions weaken.
- The fluids business was sold after year-end for approximately $44.3 million, subject to post-closing adjustments; billed accounts receivable were excluded. The filing reported no off-balance-sheet arrangements and said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Management and the auditor reported effective internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether drilling demand, utilization, and day rates recovered after the year-end activity rebound, and whether the large idle fleet can be deployed profitably.
- Whether the $114 million expected tax refund was received and how much operating cash flow reflected temporary working-capital changes.
- Final proceeds and adjustments from the fluids-business sale, and any remaining liabilities or collection risks tied to excluded receivables.
- Execution and financing of the $186.2 million equipment commitments, and whether planned capital spending remains appropriate under market conditions.
- Pressure-pumping profitability and returns on capacity added for Appalachian unconventional-reservoir activity.
- Potential asset or goodwill impairments, insurance adequacy, and compliance with environmental obligations and credit covenants.